Werlinich Asset Management, LLC
400 Columbus Ave.
Valhalla, NY 10595

December 19, 2005 Comments   |   Refer A Friend   |   Sign Me Up   

The Black Book on Personal Finance, which I co-authored with a chapter entitled "Sector Rotation Investing", is now available for sale at or Barnes & The book is also available at selected bookstores around the country. Please consider buying a copy. I'm sure you will learn something. Thank you.

For those of you in the area, I will be doing a book signing at the Barnes & Noble in the City Center mall in White Plains on February 7. I will provide more details as the date grows closer.

Market Analysis...All Rise
Last Month's Results - Huge Rally
What I'm Doing Now...Ready for 2006
Statistics...Mixed Messages
Trends To Watch
Monthly Tip...Estate Planning
Personal News and Notes

Market Analysis...All Rise

For the second straight year, after ten mediocre months, November brought a huge rally that raised the market into positive territory for the year. All of the broad market averages were up strongly, which is clearly shown in the Last Month's Results section. And the market has managed to retain those gains so far this month, but not without quite a bit of volatility (see the graph below). After rising to 10,960, the Dow quickly dropped back below 10,800. As I write this morning, the Dow is hovering around 10,900. Obviously, the next big hurdle for the Dow is to surpass the psychological barrier of 11,000. If it can do that, the next big target would be the five year old high of 11,700.

After rising about 750 points in the past two months, the Dow has broken out of the relatively narrow trading range that it had been stuck in for most of the year. It will be very interesting to see what happens over the next two weeks before the end of the year. Will it pierce 11,000 or trend back down? Stay tuned.

Another interesting, but not at all surprising, trend to me is the recent strength in oil prices. After a three-month slide that dropped prices from $70 to $56, the price for West Texas Crude is back to around $60 per barrel. Unlike many analysts, I never expected the low prices to hold, if for no other reason than winter has arrived for much of the country, and the cold weather will increase the use of home heating oil and natural gas. I can tell you that my combined electric and gas bill doubled from October to November. It is going to be a very expensive winter for many people this year. I'll say it again; I believe we are in a bull market in energy and natural resources. We're just in a period of consolidation right now. Times like this shake out the weak investors and embolden the strong ones.

The two-month increase in Treasury yields appears to be over, at least temporarily. Yields have fallen from a high of almost 4.7% to a shade above 4.4%. Not surprisingly, this weakness has coincided with the recent weakness in the dollar (see below). As expected, the Fed increased the short-term lending rate at their meeting last week. While they moderated their language a bit, it is expected that they will tighten again at the January meeting, bringing the short-term rates to 4.5%. If the long-term rates don't move higher, that might result in an inverted yield curve, which almost always presages a recession. The spread between the 10-year Treasury and the TIPS has dropped a bit to 2.40%, which indicates that inflation fears are abating. 

Last Month's Results...Huge Rally

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. November provided the big rally that investors were waiting for. There were big gains across the board and they were large enough to push all the major indices into the black for the year. I have to admit that I didn't expect this rally to happen. That being said, I'm perfectly happy to enjoy the gains, along with everyone else. Now we just have to wait and see what happens between now and the end of the year to see if the Dow and S&P will end the year in positive or negative territory.

Name of Index





S&P 500




Large-cap stocks

Dow Jones Industrial Average




Large-cap stocks

NASDAQ Composite




Large-cap tech stocks

Russell 1000 Growth




Large-cap growth stocks

Russell 1000 Value




Large-cap value stocks

Russell 2000 Growth




Small-cap growth stocks

Russell 2000 Value




Small-cap value stocks





Europe, Australia, Far East

Lehman Aggregate




US government bonds

Lehman High Yield




High-yield corporate bonds

What I'm Doing Now...Ready for 2006

Over the past month I made some minor year-end adjustments to the portfolios. Wherever possible, I matched up losses with gains to minimize the effects of capital gains taxes. I also trimmed some of the weaker positions to add cash to the accounts in case some better opportunities present themselves. As I've said many times, there's nothing wrong with having some cash in your account. And with all of the rate increases, that cash generates a much better return now.

WAM's opportunistic buying of additional oil and gas positions in November have paid off so far with the recovery in the price of West Texas Crude (see above). Barring some drastic unforeseen events in the last two weeks of the year, our portfolios will have their third consecutive year of double-digit profits. All of our key sectors performed as expected and I see no reason why next year won't bring similar returns. I very much like the way WAM's portfolios are positioned for 2006. 

Statistics To Watch...Mixed Messages

  • There was an increase of 215,000 non-farm jobs in November after an anemic October. As I've said before, I won't attribute any significance to the number of jobs added or lost for the rest of the year as the post-hurricanes employment picture gets sorted out. Average hourly wages rose to $16.32 from $16.29. The average workweek inched down to 33.7 hours.
  • The number of unemployed workers in November increased to 7.58 million from 7.43 million in October. The number of seasonally adjusted people who for economic reasons could only find part-time work fell to 4.2 million. There were another 3.8 million people for whom business conditions or lack of opportunity forced them to take part-time work. The number of marginally attached workers (those individuals who had looked for work sometime in the past year, but not in the past four weeks, and are therefore not counted as unemployed) remained at 1.4 million. My adjusted Comprehensive Labor Index™ fell to 11.89%, it's lowest rate of the year. The official unemployment rate reported by the government remained steady at 5.0%.
  • The number of people holding more than one job in November fell to 7.59 million. This is down slightly from the same time last year.
  • The most recent four-week average for initial jobless claims held steady at around 321,250 for the last month. The low for the year was 306,000 and the high was 394,000 (post-Katrina).
  • The University of Michigan Consumer Confidence Index in November rose (not surprisingly) to 81.6 from 74.2 in October. This rise coincides nicely with the rise in the stock market during the same period of time.
  • According to CBO estimates, the federal deficit for November was $82 billion, which was $25 billion more than the same period last year. The national debt is now a staggering $8.1 trillion.
  • According to the Census Bureau, the U.S. trade deficit grew to a new record high of $68.9 billion in October from a revised $66.0 billion in September. By itself, trade with China represented $20.5 billion of that deficit.  
  • The Labor Department reported that on a seasonally adjusted basis, the CPI for all urban consumers fell 0.6% in November. That was the largest single-month drop in 55 years and can be attributed to the rapid fall in oil prices. The "core" CPI, which excludes food and energy, remained steady at 0.2%. 
  • The Federal Reserve reported that total outstanding consumer credit was fractionally lower in October, falling to $2.157 billion. Consumer indebtedness remains at record levels.
  • The American Association of Individual Investors' (AAII) bullish sentiment was surprisingly weak recently, falling in each of the last two weeks to its current level of 49.5%.
  • According to the Census Bureau, retail trade and food service sales edged up 0.3% in November and were up 6.3% from the same period last year.
  • The Census Bureau reported that privately owned housing starts in October fell 5.6% from September to a seasonally adjusted annual rate of 2.014 million. This was also 2.3% below the same period last year and the second lowest level of the year.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in October rose 13% to a projected 1.424 million units, following up on a good September. The estimate of 496,000 new homes for sale represents about 4.3 months at the current rate of sales, a decrease from the last two months. We'll have to see if this is a brief anomaly or the reversal of a  weakening trend in the housing market.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were were down 2.7% in October to a projected 7.09 million units. The estimate of 2.868 million existing homes for sale represents about 4.9 months at the current rate of sales, and is the largest available supply in years. Average sale prices continue to remain high.
  • The Institute for Supply Management (ISM) index of manufacturing activity measured 58.1 in November, down from 59.1 in October. This marks the 30th month in which economic activity in the manufacturing sector is reported to have grown. Anything above 50.0 is considered to be an indication of growth.
  • According to the Bureau of Economic Analysis, the "preliminary" estimate of real gross domestic product, the output of goods and services produced by labor and property located in the United States, increased at an annual rate of 4.3% in the third quarter of 2005. This is an increase over the "advance" estimate of 3.8% released last month. It is unlikely that the fourth quarter will maintain this level of GDP growth.
  • The Fed continues its policy of flooding the market with dollars. The Fed has increased the supply of M-3 by 7.4% this year and by 8.9% in the last three months alone. This injection of money is very inflationary and continues to erode the value of the dollar.
  • Foreigners now hold over $1.5 trillion in US debt. Everyone please send a thank you note to the Chinese and Japanese governments for financing our country.
  • The NYSE reported that over four days in early December, a seat on the Exchange sold for $4 million, a new record price. Since then, the price has fallen rapidly to $3.275 last week.

I'm going to sound like a broken record but I continue to be amazed by the resiliency of our domestic economy and the recent strength of the stock market. The labor market is strong and consumer confidence appears good enough. GDP growth is excellent and inflation appears to be under control. That being said, the same storm clouds I've been talking about for a while continue to exist. My biggest worry is rising interest rates and its eventual effect on the housing market. I'm also worried the consumer may be tapped out, which would hurt the retail sector. In addition, the twin deficits continue to grow, seemingly unabated. We're still in Iraq with no clear exit strategy in sight. And finally, if the yield curve inverts, as it is close to doing, it is an almost perfect predictor of a looming recession.

Trends To Watch

The broad, year-long trading range of 11,000 to 10,000 for the Dow continues to hold, albeit barely. All we can do is watch and wait to see if this range will be broken.

The price of gold exploded in November and early December to a peak price of $541 per ounce, its highest price in 18 years. Over the past week, prices have dropped considerably, resulting in a current price of just over $500. For three years I've been advocating that everyone should have a position in gold. My prediction that gold would reach $500 is now a reality. I'll have a new prediction next month.

Concurrent with the rise in the price of precious metals is the general rise in the price of all commodities. The following chart, which mirrors some of the movement in the price of gold, shows that like gold and oil, commodities are in a bull market right now, with a very solid upward trend.

The value of the dollar had been rising in lockstep with the increase in interest rates until very recently. Over the past two weeks the dollar has weakened significantly, possibly because of the horrible deficit numbers. I'll be looking to see if the dollar manages to stay above its 200-day moving average.

The price of oil continues to consolidate between $55 and $60. Don't let this move fool you; the bull is still in charge here.

I think the real estate market is on very dangerous ground. If interest rates continue to rise, housing starts and home sales cool, it will break the piggy bank used by many Americans for the past few years and would likely plunge us right into a recession.  

As expected, the Fed increased their short-term lending rate to 4.25%. It is likely that they will increase the rate to 4.50% in January at Chairman Greenspan's last meeting. As I've said before, pay very close attention to the yield curve. If it flattens, or inverts (where short-term rates are higher than long-term rates), a recession is very likely to follow.

Monthly Tip - Estate Planning

This month I've asked Kevin Cohen, an estate planning attorney and elder care attorney, to review some of the important issues in estate planning. This is a very important topic for every one of my readers. I hope after reading this, many of you will be moved to take immediate action on your own estate plans.

I am always surprised to learn how many friends, relatives and colleagues do not have a will. Unfortunately, the cost of dying without a well thought out, comprehensive estate plan can be extremely expensive. Often, the excuses I hear from those who put off meeting with an estate attorney include: “I don’t have the time”; “I don’t think it is necessary”; “It’s too expensive” or “I just can’t contemplate my own death, it’s too scary”. This article addresses these issues and will guide you through the process of establishing an estate plan.

Who needs an estate plan?

1. Parents With Young Children.

No matter how large or small your estate is, every parent of minor children needs a will. A will not only distributes one's assets, but also provides for the election of a guardian for children who are under eighteen. Parents are usually best-suited determine who should care for their children in the event of their untimely death. In the absence of a will, relatives or others who may not have been the deceased parents’ first choice can petition the court to appoint them as guardians of the surviving minor children.

A guardianship proceeding is time-consuming and costly, leaving the minor children in a state of limbo until a final decision is rendered by the governing court. Moreover, without a will, the children will have very limited access to the estate assets while they are minors. More troublesome is that all of the assets will be distributed to the surviving children upon their eighteenth birthdays. Most parents believe that an eighteen-year-old is too young to be completely responsible for his/her own finances. A will can govern how and when the estate assets will be distributed to the surviving children through a trust provision.

2. Married Couples With Assets Exceeding $1,000,000.

A married couple with assets in excess of $1,000,000 can benefit dramatically from a well prepared will that serves to maximize their state and federal estate tax exemptions. Many clients believe that they don’t need to concern themselves with estate tax issues, particularly in light of the increase in the federal estate tax exemption[1]. However, life insurance proceeds[2] and retirement accounts are included in a taxable estate, and when coupled with the inflated value of real property, most married couples have more assets than they think. Further, it is important to note that New York State will continue to tax estates valued in excess of $1,000,000.

Failure to maximize the estate tax exemptions in both spouses’ estates can result in the surviving beneficiaries paying hundreds of thousands of dollars in taxes which could otherwise pass to the couple’s children. Many simple wills provide that on the death of the first spouse all assets pass to the surviving spouse and on the death of the surviving spouse, everything passes to the children. The problem with this plan is that by failing to use the estate tax exemption of each spouse, a significant amount of estate tax is paid which could otherwise be protected with a professionally drafted will.

3. Business Owners.

Business owners can benefit most from the implementation of an estate plan. The manner in which the business is held can result in significant estate tax savings. An efficient estate plan also facilitates the transfer of the business upon the death of the business owner.

The use of a buy-sell agreement allows partners to purchase each other’s interests in the business upon the death of one of the partners. This technique provides instant liquidity to an estate by converting an individual’s business interest to cash. It will ensure that a business owner receives a fair, reasonable price for his business. Through the use of a buy-sell agreement, a purchase price will be established among all parties while the business is vital, rather than determining the value after the death of the owner, when it's vulnerable to being undervalued. The buy-sell agreement will also provide a methodology for determining the market value for federal estate tax purposes. The IRS will generally accept this value if the agreement is structured correctly.

Advance Directives and Powers of Attorney, an Important Part of any Estate Plan

As part of the will drafting process, a trusts and estates attorney should provide the client with a set of documents commonly referred to as advance directives. These documents permit you to do advance medical care planning and are crucial in the event that you suffer an incapacitating disability because they make your wishes regarding your health care choices clear to loved ones and doctors.

There are two types of advance directives: a health care proxy and a living will. A health care proxy enables you to appoint a person whom you trust to make health care decisions for you if you are not able to do so yourself. A living will states one’s wishes regarding medical treatment in the event you are unable to express those wishes. It also sets forth whether or not you wish to be sustained on life support if you will not likely recover from an illness or injury that will result in your death or mental and physical incapacitation. The living will describes the kind of care you wish to receive. The living will also asks that your doctors, family members, hospital and the courts honor your wishes regarding life support.

A Durable Power of Attorney also offers protection to an incapacitated person. The Power of Attorney is a general power that gives the independent right to another person to act as attorney-in-fact in a fiduciary capacity for the principal, and consequently the authority to do anything with the principal’s property that the principal could do himself or herself. As long as the principal is mentally competent to do so, a Power of Attorney may be revoked at any time. Unless revoked, the Power continues until death.

The Power of Attorney does not take away the principal’s power to act on his or her own behalf. Since the Power of Attorney is “durable,” the attorney-in-fact’s ability to act on the principal’s behalf would survive the principal’s incompetence or incapacity. A Durable Power of Attorney is particularly important if the principal becomes incapacitated, since this would obviate the need to commence a guardianship proceeding that can be very time consuming and expensive.

It is important to note that a Durable Power of Attorney form that you can buy in a stationary store or on-line is not necessarily extensive enough. For example, an expanded Power of Attorney form would be needed in order to facilitate Medicaid planning.

Choosing a Trusts and Estates Attorney

Since planning for your own death can be a frightening and morbid task, it is important to select an attorney with whom you feel comfortable. Your attorney’s law practice should focus primarily on trusts and estates law. Many attorneys will claim that they can do a “simple will” even though they do not concentrate in the area of estate planning. Although these attorneys might be skilled in their primary area of practice, they are not likely well versed in comprehensive estate planning issues, tax consequences, trusts, guardianships, etc.

Choose a trusts and estates attorney who has honed his or her estate planning skills and has “seen it all”. A personal reference is always a good place to start when looking for an attorney, not the yellow pages. Make sure that the attorney’s legal fee for a last will and testament includes the advance directive documents as well. Although the fee might seem like an expense you’d rather not incur, it is a small investment that should result in significant benefits to you and your beneficiaries.

[1] In 2005 any person can die with $1.5 million and pay no federal estate tax. This exemption amount is scheduled to increase to $2.0 million in 2006 and $3.5 million in 2009. The estate tax will be repealed for 2010, however, the tax law is drafted in such a way that the estate tax will come back into effect in 2011 unless Congress passes further legislation which is signed into law by the President.

[2] There are ways in which a taxpayer may exclude life insurance proceeds from his or her estate, however, this topic goes beyond the scope of this article.

Kevin H. Cohen, Esq., is a trusts and estates and elder law attorney based in White Plains, New York and is the principal of The Law Offices of Kevin H. Cohen, P.C. Kevin can be reached at 914-949-3411 or via email at You can also visit for more information.

Personal News and Notes

As I've mentioned before, The Black Book on Personal Finance is now available for sale on, Barnes and and a number of retailers around the country. I urge you to go out an buy a copy. Let's see if we can make it a bestseller. In addition, I have a book signing at a local Barnes and Noble scheduled for early February. I'll have more information next month.

For those of you who haven't finished making your year-end charitable contributions, I'm going to repeat my message from last month. In an unprecedented move, Congress has recently made temporary tax law changes to encourage more charitable giving. The Katrina Emergency Tax Relief Act of 2005 (KETRA) includes a number of important provisions pertaining to charitable giving. Among these provisions are incentives for taxpayers who give gifts of cash between August 28 and December 31, 2005. As you may already know, deductions for cash gifts to charities are generally limited each year to 50% of a taxpayer’s adjusted gross income (AGI). Any gift amounts beyond this limit may be carried over as a deduction, up to five additional years. Effective August 28, Congress has suspended the 50% limit on cash gifts to qualified charities. In other words, this year alone individuals may deduct charitable cash gifts in amounts up to 100% of their AGI. If you have already given more than 50% of your AGI prior to August 28th, you should speak with your professional tax advisor about the different deductibility limitations for gifts made before and after that date. Also waived is the 3% mandatory reduction on charitable deductions for taxpayers whose AGI exceeds a certain level.

I want to wish each and every one of you a happy holiday season and a healthy and prosperous New Year. It's been a very good year for me, my family and my business and I'm looking forward to even better things next year. I look forward to reporting back to you in January as I grade my predictions for this year and offer you new ones for 2006.

As always, I thank you for your interest and consideration, and invite you to contact me if you have any questions or if I can be of service to you in any way.

Best regards,

Greg Werlinich

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